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Here’s What Hedge Funds Think About Applied Optoelectronics Inc (AAOI)

Nina Todic

Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Applied Optoelectronics Inc (NASDAQ:AAOI).

Applied Optoelectronics Inc (NASDAQ:AAOI) shareholders have witnessed an increase in support from the world's most elite money managers lately. Our calculations also showed that AAOI isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Chuck Royce

We're going to take a look at the recent hedge fund action surrounding Applied Optoelectronics Inc (NASDAQ:AAOI).

Hedge fund activity in Applied Optoelectronics Inc (NASDAQ:AAOI)

Heading into the second quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AAOI over the last 15 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with AAOI Positions

The largest stake in Applied Optoelectronics Inc (NASDAQ:AAOI) was held by Newtyn Management, which reported holding $4.2 million worth of stock at the end of March. It was followed by Royce & Associates with a $3.9 million position. Other investors bullish on the company included Citadel Investment Group, Alyeska Investment Group, and Citadel Investment Group.

As one would reasonably expect, key hedge funds were breaking ground themselves. Newtyn Management, managed by Noah Levy and Eugene Dozortsev, initiated the biggest position in Applied Optoelectronics Inc (NASDAQ:AAOI). Newtyn Management had $4.2 million invested in the company at the end of the quarter. Chuck Royce's Royce & Associates also initiated a $3.9 million position during the quarter. The following funds were also among the new AAOI investors: Anand Parekh's Alyeska Investment Group, D. E. Shaw's D E Shaw, and Jim Simons's Renaissance Technologies.

Let's now review hedge fund activity in other stocks similar to Applied Optoelectronics Inc (NASDAQ:AAOI). These stocks are Novavax, Inc. (NASDAQ:NVAX), NCS Multistage Holdings, Inc. (NASDAQ:NCSM), Gold Resource Corporation (NYSE:GORO), and Cytosorbents Corp (NASDAQ:CTSO). All of these stocks' market caps match AAOI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NVAX,11,8979,-2 NCSM,5,1509,1 GORO,9,14483,2 CTSO,7,7323,-2 Average,8,8074,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $20 million in AAOI's case. Novavax, Inc. (NASDAQ:NVAX) is the most popular stock in this table. On the other hand NCS Multistage Holdings, Inc. (NASDAQ:NCSM) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Applied Optoelectronics Inc (NASDAQ:AAOI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately AAOI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AAOI were disappointed as the stock returned -28% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market in Q2.

Disclosure: None. This article was originally published at Insider Monkey.

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